Monday, May 24, 2010Last Update: 9:33 AM PT

Banks Rigged Bids, San Jose Says

OAKLAND, Calif. (CN) - In a federal antitrust complaint, San Jose claims it was victimized by "a far-reaching, industry-wide conspiracy" in which municipal derivative providers and brokers rigged bids, allocated markets, submitted bogus "courtesy bids on transactions they had no intention or desire to win in order to give transactions an artificial veneer of fairness," paid and received kickbacks, and otherwise depressed the city's earnings to fatten their own. The city cites investigations by other cities, counties and federal agencies that turned up widespread bid rigging. San Jose claims it conducted its own investigation, which "revealed a far-reaching, industry-wide conspiracy through which municipal derivative providers, working with municipal derivative brokers, foreswore competition with one another in the municipal derivative transactions of San Jose and others. Instead, they manipulated and allocated the municipal derivatives market amongst themselves in ways that included but was not limited to: signaling to each other their intended bids and whether they were interested in winning a particular transaction; submitting courtesy bids on transactions they had no intention or desire to win in order to give transactions an artificial veneer of fairness; refraining from bidding on transactions to allow another to prevail without competition; lowering their intended bids in response to signals that the transaction could be won by them at terms that would yield higher profits; giving false price verification reports; kicking back money through undisclosed and/or unearned fees; and other actions that depressed the returns that San Jose and other municipal bond issuers earned on municipal derivative transactions and otherwise caused them economic injury, while inflating the profits of defendants. ... "Moreover, San Jose's investigation has revealed probative evidence that the conspiracy also operated to deny municipal bond issuers competition in the services provided by brokers of municipal derivatives and compel them to pay exorbitant fees for such services. "Because of the pervasiveness of this conduct and the inter-transactional relationship of defendants' illegal conduct, the conspiracy has had a market-wide effect on the terms of municipal derivative transactions and prices of services associated therewith, depriving San Jose and other municipal bond issuers of the benefits of free competition. As a result, San Jose suffered harm in several ways, including, but not limited to: (a) receiving rates on municipal derivatives that were artificially depressed and uncompetitive; (b) being forced to engage counter-parties to municipal derivative transactions that carried increased credit risks that were not reflected in the terms of the transactions; and (c) being forced to pay uncompetitive, inflated fees and costs in municipal derivative transactions." The 178-page complaint seeks damages for antitrust violations. Defendants include Bank of America, Merrill Lynch, UBS, Citibank, Citigroup, Morgan Stanley, Goldman Sachs, and others.